Having a viable business plan is a valuable first step to establishing your own business, but afterward, finding the capital to bring it to fruition is critical. Here, the business advisors at Snee, Lutche, Helmlinger & Spielberger detail ways to finance your business plan.
Equity financing is when an investor provides equity for you to build your business. There are typically two distinct kinds of investors who may provide equity for a business: Angel investors are traditionally wealthy individuals who wish to invest money in a specific product, instead of becoming intimately involved in a business, while venture capitalists are often firms that invest larger sums of money into a business as a whole.
Equity financing provides liquid cash on hand that can be used in a variety of ways—this equity does not have to be paid back, and if your business fails, the loss is shouldered by the business and investor. The price for liquid cash, however, is a loss of ownership in the company—an investor will own a portion of the company, and take that portion of the profits. As a partner in the company, they will also normally have decision-making power in the day-to-day operations of the business, unless classes of stock are utilized to limit or prohibit voting power.
Debt financing works on the same principles that a car loan or mortgage does: a business seeks financing from a bank or financial institution in the form of a loan. The loan provider will determine their confidence in the business’s ability to repay the loan by analyzing the business owner’s credit history, the businesses’ credit history and business records (if applicable). Loan terms will vary, as will interest rates, which are dependent on the institution and the credit history of the business or business owner. Unlike equity financing, the financial institution does not receive a stake in the company, and the business is not beholden to the institution—but the loan must be re-payed, including interest and the lender will take security interest in the business assets and the owners will need to personally guarantee the loan.
Small Business Administration Loan (SBA)
Loans are available for small business owners that are guaranteed, or backed, by the federal government’s Small Business Administration. There are specific requirements for eligibility. Note that this is a loan, not a grant, and the money will need to be repaid.
Family and Friends
For those with smaller investment needs, friends and family can be a less expensive alternative to traditional financing, however, it is advisable to approach family and friends similarly to approaching a traditional lender. You should establish a strong business plan, formal financial projections and evidence-based assessments, as well as detail your specific financial needs. Be honest about their chances of seeing profits or losses so that they can make an informed decision and be sure to document any such loans properly.
How SLH Can Help Business Owners
Small businesses are the heart of the American economy, and as such we believe they deserve to be provided opportunities for growth and success. Every small business deserves a hardworking and dedicated legal team, who is available to assist in establishing and structuring companies, acquiring equity, preparing business contracts and agreements and more. SLH has the experience your business needs to succeed—contact us today for more information or to schedule a consultation.